Ponzi Victims: The Sky is Falling under Trump’s New Tax Plan


By Kevin G. Diamond, CPA

This article is meant to sound the alarm for all victims of Ponzi-like-schemes, as their sky is falling. President Trump’s “Tax Cut and Jobs Act”[i] eliminates the “Theft Tax Loss” provisions of the Internal Revenue Code (“IRC”). 

While investors are excited about many provisions of Trump’s Tax Act and its lower rates, when it comes to victims of Ponzi-like-schemes … Chicken Little is screaming “the sky is falling, and the end is in sight!”  It appears that these victims will no longer be able to file for these losses going forward and must act now or lose this great tax benefit.

For 50 years, the tax law allowed victims of Ponzi schemes to use IRC Section §165 (c) (2)[ii] for claiming a “theft tax loss."  This area of tax law was revised and enhanced[iii] in 2009 to help victims of Bernard L Madoff’s $68.4 billion Ponzi scheme.    

However, Trump’s new tax act will eliminate these beneficial provisions for victims of Ponzi-like-schemes as of December 31, 2017, which must be claimed on their 2017 Tax Returns.  Under the Act, effective for losses incurred in taxable years beginning after December 31, 2017 and incurred before January 1, 2026, a taxpayer may claim a personal casualty loss only if such loss was due to a disaster as declared by the President under the Stafford Disaster Relief and Emergency Assistance Act.[iv]

Three recent newspaper stories point out just a few of the latest Ponzi schemes which include:

1)      The Platinum Partners[v] and Mark Nordlicht have been charged by the SEC with running a $1 billion Ponzi-like-scheme in New York in December of 2017;

2)      The Woodbridge Group of Companies and Robert Shapiro[vi] have been charged by the SEC for running a $1.2 billion Ponzi-like-scheme targeting thousands of elderly investors in December of 2017; and

3)      The RMA Strategic Opportunity Fund[vii] and Raymond Montoya, of Boston has been charged with running Multimillion-dollar Ponzi-like-scheme in November 2017.

The current benefit for taxpayers is that these theft tax losses can be deductible from a taxpayer’s ordinary income.  Further, the losses, if qualified, can be carried back three years and carried forward for twenty years under the current tax system.  With the loss of this section of the Internal Revenue Code, investors will not be able to take the theft tax loss provisions of the IRC.   

This is a very technical area of tax law, with numerous legal requirements that suggest you are required to file a “Legal Opinion” to accompany the Victim’s tax return and amended prior years tax returns to provide the relief intended to be granted by the U.S. Congress in implementing and amending the provisions of IRC §165(c )(2). 

There are numerous legal requirements and the Investor’s tax advisor should work with an experienced tax attorney who can help to navigate the legal intricacies of the Investment Theft Tax Loss requirements.[viii]  These include, but are not limited to, such legal issues as: the tax basis; the timing of the loss; the definition of “theft” in the taxpayer’s state of residency; whether there was “privity” for the investor; and whether there was “scienter” by the “lead figure” of the “specified fraudulent arrangement, etc.”[ix] 

DISCLAIMER: this article is meant to sound the alarm of the urgency of action by victims of Ponzi like schemes, it is not meant to be scholarly analysis of theft tax loss and/or the application of Internal Revenue Code §165(c.) (2); Revenue Ruling 2009-9; Revenue Procedure 2009-20; and the Safe Harbor Provisions contained therein. It is meant to advise the victim of the Ponzi scheme and their tax advisor (attorney, CPA and/or enrolled agent) to contact an experienced tax lawyer to get a legal tax opinion that will meet the legal requirements and elements to allow for victim’s federal tax refund. 

Currently, the victims of the Ponzi like scheme have several valuable tools:

1)      Ponzi victims tools:

  1. Rev. Rul. 2009-9, 2009 I. R. B. (April 6, 2009)
  2. Rev. Proc. 2009-20
  3. Rev. Rul. 2009-9 and Rev. Proc. 2009-20 both outlines the safe-harbor rules for qualified investors that are victims of fraud or embezzlement schemes may take a theft loss beginning with tax year 2008 and currently appear to be ending in 2017;
  4. Under the safe harbor[x], a taxpayer who transferred cash or property to a “lead figure” who promoted a “specified fraudulent arrangement: may use special rules to deduct the losses in the year the fraud is discovered without waiting for recovery"; 
  5. A “specified fraudulent arrangement”[xi] is one in which a lead figure receives cash or property from an investor, purports to earn income for the investors, reports income amount to the investors that are partially or wholly fictitious, makes payments to some investors from amounts that other investors invested in the fraudulent arrangement and appropriates some or all of the investor’s cash or property; and
  6. Rev. Proc. 2009-20 provides for a two-pronged safe harbor deduction:

                                                              i.      95% of the net loss may be deducted, where the investor does not pursue any potential third-party recovery; or

                                                            ii.      75% of the net loss may be deducted, where a qualified investor is pursuing or intends to pursue any potential third-party actions for recovery.

The benefit of these tools is that the victim can apply for tax benefits now under the safe harbor provisions and still participate in any litigation and/or class actions attempts at recovery by accepting a lesser amount in your refunds.[xii]  The amounts of recovery and future taxes will be adjusted when the litigation is finally resolved, and the full amount of damages/recovery are fully known.

Hypothetical Analysis
In this hypothetical analysis, the value of the deduction can be seen in the projected $1,000,000 loss in a Ponzi-like-scheme.  Assuming that the Taxpayer made $500,000 per year for the last three years and is taxed at 35% for federal tax purposes:

                                                2015                2016                2017

Income                                   $500,000         $500,000         $    500,000

Theft Loss                                   -0-                    -0-              ($1,000,000)

Fed. Tax @ 35%                     $175,000         $175,000         $    175,000

Recovery                                     -0-              $175,000         $    175,000 = $350,000

The loss of $1,000,000 in a Ponzi-like-scheme that qualifies for theft tax loss under IRC §165(c.) (2) and filed using the safe harbor provisions of Rev. Rul. 2009-9 and Rev. Proc. 20 could then potentially help the victim recover his taxes paid for this year and go back and recover his taxes for 2016.

So while the Trump Tax Act is being hailed in many circles as a great achievement and benefit, for the victims of fraud, theft and Ponzi-like schemes, they will be best served by seeking a competent tax attorney to determine if they are eligible for the soon to disappear benefits of the theft tax loss. 

Don’t let it be said that Chicken Little did not warn you, for those victims of Ponzi-like schemes, the theft tax loss deduction and the sky are falling with the filing of your 2017 Tax Return. 

Author is Attorney Kevin G. Diamond, CPA who has written about the theft tax loss since 2007 and has a national tax practice representing victims of Ponzi schemes.  He is a member of the U.S. Tax Court. Questions and comments can find the author at kdiamond@rmdllp.com.

[i] H.R.1 known as the “Tax Cuts and Jobs Act” which was enacted on 2/22/2017.

[ii] 26 U. S. Code § 165

[iii] See IRS Rev. Rul. 2009-9 and IRS Rec. Proc. 2009-20.

[iv] See Public Law 100-707; Act § 11044.

[v] The case is U.S. V. Nordlicht et al, U.S. District Court, Eastern District of New York, No. 16-cr-640.w

[vi] The case is SEC v. Robert Shapiro, Woodbridge Group of Companies et al., U. S. District Ct., Southern Dist. Of Florida, Case No. 17-24624.

[vii] The case is U.S. v. Montoya, U. S. District Court, District of Massachusetts, No. 17-mj-2228.

[viii] Rev. Rul. 2009-9, 2009 I.R.B. (April 6, 2009) and Rev. Proc. 2009-20.

[ix] Ibid.

[x] Ibid.

[xi] Ibid.

[xii] Ibid.

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